Real Estate Investment Trust (REIT) Real estate income (O -0.24%) is a net rental giant and industry indicator. Investors often give it a high price, and for good reason. Here’s why this REIT is such an attractive investment option and why Mr. Market’s asking price right now is probably a bit too high.
The positive points
Realty Income uses a net rental approach, which means that it owns properties whose tenants are responsible for most of the costs of operating the premises they occupy. Any individual property is high risk, as net rental assets are generally single tenant. But on a large portfolio, the risk is quite minimal and the operating costs are very low. Realty Income’s portfolio includes over 11,000 properties.
The REIT also has some diversification in its portfolio. While approximately 83% of its rents come from commercial assets, the rest comes from industrial buildings. And it has extended its reach to Europe.
On the retail side, the portfolio spans multiple niches with a particular focus on businesses selling basic necessities, such as grocery stores and pharmacies, and those less likely to be impacted by the increasing use of online stores, such as convenience stores and dollar stores.
On top of that, the company has a superior track record. It has also increased its monthly dividend every year for 27 consecutive years, making it a dividend aristocrat. All of this helps explain why investors have historically rewarded Realty Income with a higher price than their peers.
The yield recently fell below 4%. This is towards the bottom of the company’s historical return range and suggests the stock is fully valued, if not a little expensive. So there is a tough choice for investors here.
One of the most important features of Realty Income is its low cost of capital. This comes from a good credit rating and low yield, which is a rough approximation of what it costs to sell stocks. Cheap access to cash allows the REIT to accept high quality transactions that may not be profitable for competitors who must pay more for their capital. But there’s a fine line here because today’s low dividend yield also means investors are “paying” for the stock, as price and yield move in opposite directions.
Some numbers might help. Over the past month or so, Realty Income’s stock has risen 10%. This is more than double the gain of the average REIT, using Vanguard Real Estate Index ETF as agent. the S&P500 The index is down more than 5% over the same period. It seems that investors are currently turning to high-quality dividend-paying stocks. That’s not a bad thing in and of itself, but it pretty quickly moved Realty Income even further into premium pricing territory.
If you’re looking for a reliable dividend-paying stock during market uncertainty, it might be worth paying for Realty Income. But it’s highly likely that stocks will eventually pull back, bringing the yield into a more attractive space – say, something closer to 5%. A return of around 6%, which would require a significant sale, would make this blue-chip REIT very attractive. For a patient investor willing to wait for a more attractive entry point, it’s probably best to wait for now.
Bid your time, if you can
A big part of investing is managing your own emotions. So it’s understandable that investors are drawn to the consistency that Realty Income offers in times of uncertainty. And if that’s what’s going to help you sleep at night right now, then maybe you want to jump in here, despite what seems like a rich assessment.
That said, understand that real estate income seems fully valued or even a bit pricey right now. And if you wait, the price, which has rallied lately, will likely return to more attractive levels over time.